Four Seasons: Gates & Co May Get a Higher Tab

One analyst thinks the investment group bidding for the hotel chain may have to sweeten its $3.7 billion offer

Never mind Windows -- Bill Gates' latest investment is all about rooms. The Microsoft (MSFT) founder, along with another heavy hitter, Saudi Arabia's Prince Alwaleed, are part of an investment group that offered $3.7 billion to take Four Seasons Hotels (FS) private, the Toronto-based hotel and resort chain said on Nov. 6.

Four Seasons' Chairman and CEO Isadore Sharp and his family holding company Triples Holdings are making the offer with Kingdom Hotels International, a company owned by a trust created by Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud. They're proposing that Kingdom and Cascade Investment, L.L.C., an entity owned by Gates, acquire Four Season's stock for US$82.00 cash per share.

Their offer represents a 28.4% premium over the closing price that Four Seasons shares had on the New York Stock Exchange on Nov. 3, 2006, and a 33.1% premium over the weighted average closing price over the past six months.

After the news, Four Seasons' stock surged 30.7% to $83.50 per share in early trading on Nov. 6. The news also sent investors checking into another luxury-hotel stocks: Orient Express Hotels (OEH) gained 8.7% Nov. 6 to $40.65.

"We think the offer is credible and will gain shareholder and regulatory approval," said Standard & Poor's analyst William Mack in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) He hiked his 12-month target price to $86 from $70, assuming prospective buyers will add a modest

sweetener to the proposed price. But he also downgraded Four Seasons shares - which are now much pricier than in recent days -- to hold from buy.

"I don't think people should buy at $84 when the highest imaginable price is $86," Mack explained to BusinessWeek.com.

If the deal happens Triples, which is currently a controlling shareholder, would hold about 10% of the company's shares. The rest of the shares would be split equally between Kingdom and Cascade. Sharp would remain CEO and he'd also get about $288 million related to a long-term incentive agreement that was put in place in 1989.

Four Seasons has established a committee of directors to consider the offer. Ronald W. Osborne, who is the chair, will be joined by William Anderson and Brent Belzberg.

"I am delighted, together with these exceptional investors, to have found what I believe is the best way to preserve and expand the long-term strategy, vision and core values of Four Seasons," said Isadore Sharp in a press release. "Having given this proposal very careful consideration, this transaction, with these investors, is the only one I am prepared to pursue."

Investors have been more than willing to pursue buyouts of other hotels recently, though, as hotel room rates and values rise. Toronto's Fairmont Hotels & Resorts Inc., for example, said on Jan. 30 that Kingdom Hotels International ("Kingdom") and Colony Capital agreed to buy it for US$5.5 billion.

Bill Gates has been actively investing through his private investment vehicle Cascade recently. On Nov. 3, for example, the Albuquerque, N.M-based energy company PNM Resources, Inc. said it had an agreemnet with Cascade for a 50% ownership interest in a new unregulated energy company, temporarily named EnergyCo, LLC.